Choosing a structure is a vital step when starting a business. In many instances, choosing the wrong entity type can mean incurring additional tax and legal liabilities. In addition, you could be faced with dealing with a series of ineffective operations which can have devastating effects. Before setting up the legal structure of a business, it is well worth the time and effort to discuss it with an experienced business lawyer. It is beneficial to learn from their experience and knowledge and it can prevent risking the future success of the business as well as help you protect your personal assets.
Crucial Considerations When Choosing a Business Structure
While there are many reasons to choose one structure over another when forming a business, there are three primary areas to consider. The three critical factors include:
- Ease of formation – It can be more difficult, costly and time-consuming to set up some business structures, others are not as complicated. How difficult or easy is it to set up your entity?
- Liability matters – As a business owner or developer, it’s important to consider personal assets when you choose the structure. For some owners, there is a need for increased protection of personal assets. This can be provided by forming an LLC or LLP rather than a sole proprietorship.
- Tax implications – Each of the possible structures has different tax implications for both your personal income and the business’ income. Choosing the wrong structure could increase tax obligations.
These are three crucial factors needing careful consideration before choosing the business structure. Each circumstance is different which may mean more weight is given to one factor over another. An experienced business lawyer can help determine which option provides the best protection for you and the business.
Other Influencing Factors
Besides the three critical considerations previously discussed, there are numerous other influencing factors. Some of these may include:
- Location of the business
- Other partners or investors
- Expected earnings/deductions
- Self-employment tax requirements
- Business goals
- Compliance formalities
- Administrative costs to set up and/or maintain a specific structure
These issues can be thoroughly discussed with a knowledgeable business attorney prior to selecting the structure that is best for your situation.
Common Types of Business Structures
Choosing your business structure will determine many things such as how the entity is taxed, how profits are divided, and the types of liabilities you may face. Here are basic descriptions of the common types:
LLC or Limited Liability Company
This is one of the most popular choices for small businesses. LLCs provide personal asset protection and profits are not taxable. Members of an LLC report profits and losses on individual tax returns.
The simplest type of business is a sole proprietorship. You are completely liable and have total control. As far as taxes go, you and the business are the same. Many times, people are sole proprietors but have no idea. For example, a person who is a freelance writer or graphic designer is a sole proprietor.
A corporation is a private entity which is owned by its shareholders. The advantage to this type of structure is the barrier it creates between the organization and your assets in the event you get sued.
Although similar to a corporation, the S-corporation is taxed differently. Corporations actually face double taxation because the shareholders and the company create two separate legal entities.
A partnership is an organization owned by at least two people. Partners will share in both losses and profits. A partnership does have to register with the state.
To learn more about business structures, bylaws and other business services, please call us today at (847) 729-3939 to schedule an appointment. James C. Provenza & Associates, PC provides 20 years of legal services in Glenview, IL specializing in non-profit organization, estate planning, wills, probate and other legal services.